Martin Lewis has shared guidance on what to consider before making mortgage overpayments. Those in the lucky position of being able to consider that may see little reason to hesitate.
Yet the money-saving expert has issued guidance on what to think about first – and whether that money could give you a better return elsewhere. His advice comes after the Bank of England steadied the base rate at 5% this month.
There have been some unusual fluctuations between savings and mortgage rates. Martin pointed out long-term fixes are dipping below their easy access counterparts on both sides but warned it may not be the case for long.
With homeowners facing this uncertainty, one fan called into the money mogul’s podcast questioning if they should overpay their mortgage or place the same amount of money they would have overpaid into a top savings account instead.
The MSE founder had a surprisingly simple answer as he shared his elegant equation for this dilemma on The Martin Lewis Podcast. He explained: “My rule of thumb is: if your mortgage rate is higher than the after-tax amount you can earn in savings…you are better off overpaying the mortgage.”
For example, if the interest rate on your mortgage is 6% but you have access to a savings account offering 5%, Martin recommends putting your cash in the former. However, he highlighted 2 caveats in this system: “1, check there are no penalties for overpaying the mortgage and 2, always give yourself an emergency fund of 3-6 months worth of bills put aside so if you were to have a problem you can still pay the mortgage.”
This warning comes from the fact that just because you’ve previously overpaid your mortgage, it doesn’t stop you from falling into arrears if you miss a future payment. Martin also urged: “Make sure the overpayments count as capital payments so it reduces what you actually owe rather than just reduce what you’re paying on future monthly payments.”
If your mortgage rate is far below your savings interest rate, the money mogul encouraged people to put the extra cash in savings where you can be “earning substantially more saving than you are holding it in a mortgage”. You could also add an overpayment with your savings when it gets closer to the time of remortgaging which will lower the amount you are borrowing and also potentially shift your loan-to-value ratio meaning you’re likely to get a better deal.
Finally, if your two rates are relatively close, roughly 0.1% difference as Martin described, then a mortgage overpayment calculator could come in handy. These can be found online and the ITV star noted: “You’re probably better off overpaying the mortgage and psychologically it’s better to overpay the mortgage anyway.”